Lifetime Allowance

What you need to know

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What is the Lifetime Allowance?

For pensions, the Lifetime Allowance (LTA) is the overall limit of tax privileged pension funds a member
can accrue during their lifetime, before a Lifetime Allowance tax charge applies. The standard Lifetime
Allowance has been frozen at £1,073,100 until 6 April 2026. The LTA is then expected to escalate by the
Consumer Price Index each year.
While most people aren’t affected by the Lifetime Allowance, you should take action if the value of your pension
benefit is approaching or above the LTA. It may still be possible for you to protect a higher Lifetime Allowance
of £1.25m based on values at April 2016, but more on that later.

Lifetime Allowance rules – what do you need to know?

When members take benefits (known as a “Benefit Crystallisation Event (BCE)) from a personal or workplace
pension, you use up a percentage of the LTA. If the individual takes more benefits later, the additional benefits
are tested against the remaining proportion of the member's LTA.
• There is no limit on the benefits an individual can receive - or 'crystallise' - from registered pension
schemes. However, there is an overall limit of tax privileged pension funds a member can accrue during
their lifetime – called the 'Lifetime Allowance' (LTA).
• When a member takes certain benefits and at some other times (such as attaining the age of 75 or on
death before 75) the amount of LTA they have used is tested.
• When the members' benefits, along with any other benefits they have taken, are over the LTA, a
'Lifetime Allowance charge' is applied to the value in excess of the LTA.
• A full list of the different types of BCEs can be found in HMRC's Pensions Tax Manual.
Your state pension is not classed as a BCE and does not use up your Lifetime Allowance.

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Am I impacted by the Lifetime Allowance?

A range of factors will contribute towards an individual exceeding the Lifetime Allowance. You are more likely
to breach the Lifetime Allowance if you have:
• a high income
• long service in a defined benefit/final salary pension scheme
An individual with an annual defined benefit pension at retirement worth over £53,650 p.a would exceed the
Lifetime Allowance for the 2020/2021 tax year, more on this later.
As pensions are normally a long-term commitment, what might appear modest today could exceed the Lifetime
Allowance by the time you want to take your benefits, especially as many High Net Worth Individuals may be
seeking to access benefits as late as age 75. This is illustrated by the diagram below, assuming no further
contributions are made.

It may be necessary to take your pension early or stop contributing to the scheme/plan, even though you have
not retired, to avoid your benefits exceeding the Lifetime Allowance. The test for the Lifetime Allowance is
done each time you access a pension benefit.
• Calculations may need to be carried out every year if Lifetime Allowance and Annual Allowance could
be an issue. Tax charges may not always be a bad thing if the overall outcome is better for you. What
is crucial is that the relevant calculations are done so that you know what to expect.
• When undertaking a planning process there are considerations particular to whether Lifetime
Allowance, Annual Allowance or both, apply to you.
• Even if Lifetime Allowance or annual allowance tax charges apply, pension saving could still be
advantageous for you. More on this later in the section “Considerations for those potentially ceasing
contributions due to the Lifetime Allowance - A process for planning Lifetime and Annual Allowance”
• Alternative tax efficient strategies could involve vesting to drawdown and recycling income efficiently
or using Enterprise Investment Schemes, Venture Capital Trusts, Open Ended Investment Companies
(OEIC), bonds or an ISA.

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How is the LTA calculated?

Whenever benefits are taken from a personal or workplace pension, they use up a percentage of your Lifetime
Allowance.
(Value of benefits taken/Lifetime Allowance in that tax year) * 100 = % of LTA used.
Note: The percentage expressed on the statement should be a rounded down figure to two decimal places ie. 25.558%
becomes 25.55%.

Type of pension How to value it

Personal pensions or defined contribution schemes The current value of the investments and cash
including SIPPs - that are not yet in payment

Final salary or defined benefit pensions - that are not The annual pension x 20 plus any additional tax free
yet in payment cash entitlement

Pensions which have been accessed on or after The percentage of the Lifetime Allowance used up as
6 April 2006 shown on the certificate issued by the pension
provider. This percentage is then applied to the
current LTA

Final salary or defined benefit pensions - which were The annual pension x 25 at the first time you take
accessed on or before 5 April 2006 benefits on or after 6 April 2006. This is then adjusted
Annuities - purchased on or before 5 April 2006 to take into account any change in the LTA between
the date you first took benefits after 6 April 2006
and today

Pensions in capped drawdown - that started before 80% of the maximum income you are permitted to
6 April 2006 take x 25 at the first time you take benefits on or
after 6 April 2006. This is then adjusted to take into
account any change in the LTA between the date you
first took benefits on or after 6 April 2006 and today

Pensions now in flexi-access drawdown that started 80% of the maximum income you would have been
in drawdown on or before 5 April 2006 - and were not permitted to take under capped drawdown in the
previously in flexible drawdown year you converted to flexi-access drawdown x 25 at
the first time you take benefits on or after 6 April
2006. This is then adjusted to take into account any
change in the LTA between the date you first took
benefits on or after 6 April 2006 and today

Pensions now in flexi-access drawdown that started 80% of the maximum income you would have been
in drawdown on or before 5 April 2006 - and were permitted to take under capped drawdown in the
previously in flexible drawdown year the flexible drawdown declaration was made
x 25 at the first time you take benefits on or after
6 April 2006. This is then adjusted to take into
account any change in the LTA between the date you
first took benefits on or after 6 April 2006 and today

If your pre-April 2006 pension exceeds 100% of the Lifetime Allowance, then you will be deemed to have no
Lifetime Allowance remaining for future BCEs.

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What if I have more than one pension arrangement?

If you have more than one pension arrangement, then you will use up a percentage of your Lifetime Allowance
in the order which you take them. The Lifetime Allowance you will need to use in the calculation is the allowance
in the tax year which you take the BCE.
The Lifetime Allowance amounts for each year can be found at the end of this guide.
Example: If you use your DC pension pot of £125,000 to purchase an annuity on 1 June 2014 (when the
LTA was £1,250,000) then you will have used up 10% of your Lifetime Allowance (£125,000 / £1,250,000)
x 100 = 10%).
This will mean you have 90% of the prevailing Lifetime Allowance remaining.
If you also had a Defined Benefit pension of £5,000pa which came into payment on 1 June 2016 (when the
LTA was £1,000,000) you will use up a further 10%.
(£5,000 x 20) = £100,000 / £1,000,000 x 100 = 10%.
So, at this point you will have used 20% of the LTA and have 80% remaining. The monetary value of this 80%
will depend on the Lifetime Allowance applying in the year which you start to take any further pension benefits.

Prevention of overlap for Drawdown Pensions

Drawdown pensions (other than those established prior to 6 April 2006) are tested against the LTA twice.
The first test is through a Benefit Crystallisation test (BCE1) when the funds are first designated into drawdown
and then typically again either on:
• Scheme pension (BCE 2) or
• Annuity purchase (BCE4) or
• Reaching age 75 (BCE 5A)
To ensure there is no double counting only the increase in funds initially crystallised are tested at the second
designation. i.e. investment growth less payments of income made. Any income taken is not added back in,
simply the arrangement value at age 75, less the original amount crystallised will use LTA.

Example
In August 2006, the member designated £300,000 as a drawdown (unsecured pension at the time) fund. This
used up £300,000/£1,500,000 - 20% of the standard LTA.
The member then subsequently decided to buy an annuity with those funds in June 2017. At that time
the funds had grown to £350,000. This used up a further (£350,000 - £300,000) / £1,000,000 - 5% of the
standard LTA.
Where partial uplifts are done, or multiple designations have been made, the calculations are done
proportionately. A negative amount does not result in an increase to the member's LTA.

What if I exceed the Lifetime Allowance

Any pension savings above the Lifetime Allowance are subject to the Lifetime Allowance charge. This charge
will be:
• 55% if the excess is taken as a lump sum
• 25% if the excess is taken as income, for example as a scheme pension, an annuity or drawdown.
Income tax at your marginal rate will then also be payable.

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Example: If the value of your pension savings exceeds the LTA by £1000, and you want to take this as a lump
sum, then you will pay £550 in tax and receive the remainder (£450) as a lump sum after tax.

Lifetime Allowance

£ -55% £
£1000 £450
Example: If the value of your pension savings exceeds the LTA by £100,000, and you want to use the excess
to purchase an income, then you will pay a £25,000 tax charge and have the remaining £75,000 available to
receive as income (either to put into drawdown or to use to purchase an annuity).

Lifetime Allowance Higher Rate Tax

£ -25% £ -40% £
£1000 £750 £450
Assuming higher rate income tax (40%) is payable on the full £1,000 then this would again mean a net receipt
of £450, the same as the 55% lump sum tax charge.
If your DB pension exceeds the LTA, then your pension will be reduced to consider any LTA tax charge.
Once in payment, any income you receive will be subject to income tax at your marginal rate.

The Lifetime Allowance test at age 75

All benefits must have been tested against the member's LTA by the member's 75th birthday (BCE 5, 5A or 5B.)
For unvested funds even though there is a BCE at age 75 where benefits are subsequently taken post 75 the
BCE percentage 'crystallised' at age 75 is ignored for the purposes of calculating benefits.
If the member has uncrystallised funds on their 75th birthday any excess over the LTA will be charged at 25%.
The funds will technically become crystallised at that point, but subject to remaining unused LTA (as per the
paragraph above), tax-free cash (PCLS) and UFPLS may still be available.
If the member wishes to take an LTA excess as a lump sum, they must choose to take the excess to provide
this (if the scheme allows this) before they reach 75 (they must have used or will use up 100% of the LTA to
do this).

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Can I protect myself from the impact of the Lifetime Allowance

Protection is designed to shelter large pension funds, in part or in full, from the effects of the Lifetime Allowance
charge. It was possible to register for protection when it was introduced in April 2006 and when it decreased
in 2012 and 2014. It is no longer possible to register for these protections, though you can still apply for 2016
protections. You can find out more on the different pre 2016 protections on HMRC’s website here.

Fixed Protection 2016 Individual Protection 2016

Maximum amount of protected £1.25m Value of your pension fund at 5

fund value April 2016 subject to a maximum
of £1.25m

Tax free cash protection 25% of the fund value up to 25% of the fund value up to the
£1.25m protected amount

Conditions No further pension contributions Value of pensions at 5 April 2016

on or new pension arrangements must be more than £1m
on or after 6 April 2016. Must not have primary protection
No other forms of protection can or individual protection 2014
be held, other than individual
protection 2014 and 2016. But
you can have both fixed and
individual protection for 2016,
so if you do lose your fixed
protection you can still rely on
your individual protection and
make further contributions

Can you continue making Not after 6 April 2016 Yes

contributions?

How do you apply? Application is online at https://www.gov.uk/guidance/pension-

schemes-protect-your-lifetime-allowance and you will need to have
an HMRC Online Services account

Prior to 6 April 2020 your scheme administrator was required to provide you with a valuation of your benefits
as at 5 April 2016. Since 6 April 2020 they are no longer required to do so but they may still provide you with
the valuation if you request it.

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Considerations for those potentially ceasing contributions
due to the Lifetime Allowance - A process for planning lifetime
and Annual Allowance

Everyone is different and will hold different pension types, risks, amounts and entitlements. The planning
required is therefore bespoke to every individual, but the process required, to determine the suitability of any
given course of action to be followed, is essentially the same from an analysis perspective.
Further information on the annual allowance can be found here: Link to HFMC Annual Allowance Doc

1. Calculate benefits based on existing arrangements projected to retirement.

2. Calculate overall cost of maintaining existing arrangements.

Considerations for both Annual Allowance and Lifetime Allowance:
• To allow fair comparisons the net of tax relief costs should be considered.
• There may be no/little cost to the individual if benefits are solely/mainly employer funded.

3. Calculate benefits payable net of any tax charge.

Considerations for Annual Allowance:
• Scheme Pays – mandatory only or voluntary available?
• Schemes arrangements for actuarial reduction of benefits including commutation factors.
Considerations for Lifetime Allowance:
• Schemes’ rules may determine the basis on which any LTA excess can be taken.
• Where a choice is available consider the value of a lump sum after 55% tax, or a 25% charge and
income thereafter at marginal rate tax.

Factor in any LTA protections held.

4. Calculate the value of “paid up/deferred” benefits at retirement date with no further accrual or
contributions.
Considerations for annual allowance:
• Where pension contributions cease or member opts out of active membership there will be no
more annual allowance usage.
• Carry Forward (for standard or tapered AA clients) will build up, potentially allowing savings
restarting in future (although re-joining is unlikely to be an option with DB schemes).
Considerations for Lifetime Allowance:
• Deferred pensions revaluation rates will be needed for DB schemes.
• Money purchase pots will require the anticipated investment return.
• There could still be an LTA charge.
• Factor in any protections held.

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 5. Identify the value of alternate arrangements.
Considerations for both annual allowance and Lifetime Allowance:
• What benefits would be provided by investing the net cost elsewhere?
• There may be other losses through stopping e.g. employer matching contribution, employer
sponsored life cover.
• Will your employer remodel your pension/remuneration package and what are the tax implications?

6. Add the value of “paid up/deferred” benefits to the value of any alternative arrangements at retirement
date.
Considerations for Annual Allowance:
• Can you receive / do you want an increased salary now instead of a pension contribution?
• Alternate benefits could be accrued in another tax wrapper.
• There will be at least £4,000 Annual Allowance available even if you have a tapered allowance or
you have triggered the MPAA, so no need to fully stop pension saving.
Considerations for Lifetime Allowance:
• Will clients want an increased salary now instead of a pension contribution?
• Alternate benefits could be accrued in another tax wrapper.

We appreciate that a few individuals will wish to work through this process themselves and even where you
do, we are happy to assist should you require advice to help you make the right decision.
If you believe that the benefits payable (Step 3 of the process) represent value for money then the tax charge
(Step 2) may be worth it.
The process is logical, but there are clearly considerations particular to whether Lifetime Allowance, Annual
Allowance or both apply to you.

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Historic Lifetime Allowance amounts

Tax Year Lifetime Allowance

2021/2022 £1,073,100

2020/2021 £1,073,100

2019/2020 £1,055,000

2018/2019 £1,030,000

2017/2018 £1,000,000

2016/2017 £1,000,000

2015/2016 £1,250,000

2014/2015 £1,250,000

2013/2014 £1,500,000

2012/2013 £1,800,000

2011/2012 £1,800,000

2010/2011 £1,800,000

2009/2010 £1,750,000

2008/2009 £1,650,000

2007/2008 £1,600,000

2006/2007 £1,500,000

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This publication has been prepared and issued by HFMC Wealth Holdings Ltd on behalf of HFMC Wealth Group of companies.

Last updated 8.3.21